Aviva 2009 Annual Report Download - page 263

261
Performance review
Aviva plc Notes to the consolidated financial statements continued
Corporate responsibility
Annual Report and Accounts 2009
Governance
Shareholder information
Financial statements IFRS
Financial statements MCEV
Other information
56 – Risk management continued
(d) Liquidity risk
At Group level, we maintain a prudent level of liquidity which meets the expectations of the financial services authority (FSA) and
the wider investment community. We maintain a buffer of liquid assets, determined by liquidity stress tests, which is designed to
cover unforeseen circumstances in any of our businesses.
The Group and Company have a strong liquidity position (£2.2 billion of financial assets held at Group) and through the
application of a Group Liquidity policy seek to maintain sufficient financial resources to meet its obligations as they fall due. In
addition to this strong liquidity position, the Group and Company maintain significant committed borrowing facilities (£2.1 billion)
from a range of highly rated banks to further mitigate this risk.
Asset liability matching
Generally, our individual business units generate sufficient capital from the receipt of premiums, fees and investment income,
along with planned asset sales and maturities, to pay claims and expenses. However, there may be instances where additional cash
requirements arise in excess of that available within the operating businesses. In such instances, we have several options to fund
these cash requirements including the selling of assets from the investment portfolios, using centre funds, issuing commercial
paper and the committed borrowing facilities.
The Group market risk policy sets out the minimum principles and framework for matching liabilities with appropriate assets,
the approaches to be taken when liabilities cannot be matched and the monitoring processes that are required. The Group has
criteria for matching assets and liabilities for all classes of business to minimise the impact of mismatches between the value of
assets and the liabilities due to market movements. The local regulatory environment for each business will also set the conditions
under which assets and liabilities are to be matched. The Asset Liability matching (ALM) methodology develops optimal asset
portfolio maturity structures for our businesses which seek to ensure that the cash flows are sufficient to meet the liabilities as
they are expected to arise.
Where any decision to adopt a position in respect of policyholder assets and liabilities is not closely matched but is within the
business unit’s investment risk appetite, the impact is monitored through our economic capital measurement process. The decision
taken must be justified to the local management board and Group management by a full analysis of the impact of the level of
mismatch on both risk and return.
ALM strategy may be determined at a sub-fund level for a block of closely related liabilities. Alternatively, if ALM strategy
is determined at a fund or company level, it will usually be appropriate (for pricing, financial reporting and risk management
purposes) to develop a hypothecation of assets to notional sub-funds with different liability characteristics. It is for this reason that
Group Risk provides a framework of corporate objectives within which the operating businesses develop specific and appropriate
ALM methodologies, to seek to ensure that our businesses have sufficient liquidity to settle claims as they are expected to arise.
ALM modelling is based on a projection of both assets and liabilities into the future. Stochastic models are used to set ALM
policy where fund particulars contain a range of outcomes.
A further tenet of our risk management strategy involves investment strategies, which also take into account the accounting,
regulatory, capital and tax issues. The ALM strategy also takes into account the reasonable expectations of policyholders, local best
practice and meets relevant regulatory requirements.
Our investment strategies are designed to seek to ensure that sufficient liquidity exists in extreme business scenarios. For
example, our investment strategy must consider a scenario of high lapses accompanied by poor investment markets or a general
insurance catastrophe event.
Maturity analyses
The following tables show the maturities of our insurance and investment contract liabilities, and of the financial and reinsurance
assets to meet them. A maturity analysis of the contractual amounts payable for borrowings and derivatives is given in notes 48
and 57 respectively. Contractual obligations under operating leases and capital commitments are given in note 52.
(i) Analysis of maturity of insurance and investment contract liabilities
For non-linked insurance business, the following table shows the gross liability at 31 December 2009 analysed by remaining
duration. The total liability is split by remaining duration in proportion to the cash-flows expected to arise during that period,
as permitted under IFRS 4, Insurance Contracts.
Almost all investment contracts may be surrendered or transferred on demand. For such contracts, the earliest contractual
maturity date is therefore the current statement of financial position date, for a surrender amount approximately equal to the
current statement of financial position liability. We expect surrenders, transfers and maturities to occur over many years, and
the tables reflect the expected cash flows for non-linked investment contracts. However, contractually, the total liability for non-
linked investment contracts of £59,504 million
(2008: £60,264 million, 2007: £45,492 million) would be shown in the “within
1 year” column below. Unit-linked contracts are repayable or transferable on demand and are therefore shown in the “within
1 year” column.
Financial statements IFRS